Daily Archives: July 1, 2011

The decision by Harry Reid, the majority leader in the Senate, to cancel next week’s planned recess in order to advance discussions on the US debt ceiling is a welcome indication that Washington is beginning to view the debt issue with more urgency. Viewed from overseas, the American political system has started to appear dysfunctional in recent weeks.

Democracy is inherently a messy process, but it is still unsettling for foreign holders of US debt to see the Congress openly discussing whether there might be advantages in forcing the Treasury to “prioritise” its future payments so that the flow of interest obligations can be maintained. As Tim Geithner, Treasury secretary, has pointed out, “prioritisation” means that the US would fail to meet many of its domestic obligations which have previously been legislated. That would be taken as a strong signal of a nation in financial distress. Even worse, there would be an immediate deflationary shock to the system of up to 10 per cent of gross national product as the budget deficit is forcibly closed, which would certainly send the global economy back into recession. Read more

Gavyn Davies

on macroeconomics

About this blog

About Gavyn

Commenting

A blog on macroeconomics, economic policymaking and the financial markets. Gavyn usually writes about a key topic of the week on Sunday.

Gavyn Davies is a macroeconomist who is now chairman of Fulcrum Asset Management and co-founder of Prisma Capital Partners. He was the head of the global economics department at Goldman Sachs from 1987-2001, and was chairman of the BBC from 2001-2004.

He has also served as an economic policy adviser in No 10 Downing Street, an external adviser to the British Treasury, and as a visiting professor at the London School of Economics.

Gavyn Davies is an active investor and may have financial interests and holdings in any of the topics about which he writes. The views expressed are solely those of Mr Davies and in no way reflect the views of Prisma Capital Partners LP, Fulcrum Asset Management LLP, their respective affiliates or representatives. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.

Readers are urged to seek professional advice before making any investments.